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It never, ever ends, does it?

Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Treasury Secretary Timothy Geithner recently put it, "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." The term "too big to fail" must be excised from our vocabulary.

But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk.

The solution is very simple, but you will notice that Jamie doesn't bring it up.  That's because he finds it unacceptable.

What's that solution?

Prohibit as a matter of Federal Law, and enforce it vigorously under pain of immediately dissolution, THE LENDING OF MONEY UNSECURED THAT EXCEEDS THE FIRM'S CAPITAL.

This is in fact the only way you can both end "too big to fail" and not constrain size or influence.

It is also the definition of sound lending.

It is also how lending was done prior to the banksters corrupting the government and literally usurping the sovereign credit of The United States.

As we have seen clearly over the last several years, financial institutions, including those not considered "too big," can pose serious risks for our markets because of their interconnectivity. A cap on the size of an institution will not prevent that risk. Properly structured resolution authority, however, can help halt the spread of one company's failure to another and to the broader economy.

A requirement that you hold one dollar of actual capital for each dollar of unsecured obligation you have, marked to market nightly, absolutely prevents this risk.

That actual excess capital can be lost but there can be no systemic bleed-through as your capital then backs your bets in each and every instance.

While the strategy of artificial limits may sound simple, it would undermine the goals of economic stability, job creation and consumer service that lawmakers are trying to promote. Let's be clear: Banks should not be big for the sake of being big. Moreover, regardless of a company's size, it must be well managed. As we've seen in many industries, companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time.

Then prove it by putting your own capital at risk in each and every unsecured lending transaction.  For each loan you write where the collateral is worth less than the outstanding amount of the loan, at any point in time, hold one dollar of your own capital as security against that loan's default and the bleed-through effects on the economy.

And it's not just multinational corporations that rely on such a large scale. J.P. Morgan Chase and others supply capital to states and municipalities as well as to firms of all sizes. Smaller banks play a vital role in our nation's economy, too -- but a fragmented banking system cannot always provide the level of service, breadth of products and speed of execution that clients often need. Capping the size of American banks won't eliminate the needs of big businesses; it will force them to turn to foreign banks that won't face the same restrictions.

Yes, and JP Morgan/Chase will allegedly bribe states and municipalities (aka Jefferson County Alabama) to "obtain" that business and earn a 400% profit beyond the market rate too.  Yes, I know, you didn't admit guilt in the "settlement", but you did pay $75 million and forfeit another half-billion+ in termination fees.  Is it "usual and customary" for your company to pay nearly three quarters of a billion dollars in forfeits and fines when you did nothing wrong?  Our states and municipalities would be far better off without your firm's "services."

Global economic growth requires the services of big financial firms. It also requires that big financial firms be allowed to fail.


A one-sentence Bill that, were it to become law, would instantly end "too big to fail" and yet let you grow as large as you'd like - provided you are gambling with your own money and not the sovereign credit of The United States.

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Back on July 7th I wrote a piece on Health Care Reform and laid forth some general principles.

I have since done some more synthesis on this and have a more-fully-fleshed out, and yet simpler, set of proposals to solve the problem.  With no further ado, here they are:

If you sell "insurance" to anyone in a given state, you must accept all persons in that state on the same terms and at the same price.  If an insurer has a "we accept anyone at the same price" policy for a business, you must be able to buy into their plan for the same amount of money that the employer is charged on a per-person basis.  That is, all plans must be "open enrollment" for everyone within the state - period.  This immediately gets rid of the "tie" between employment and health "insurance", and it also removes one of the biggest issues that small business and self-employed people face - the inability to buy insurance at any reasonable price if there has ever been anything wrong with them medically.  The solution to the "adverse selection" problem is identical to that which exists in corporations - you typically can only elect out or in of a policy or plan on an annual basis - that is, you're obligated to participate for a full calendar year.  Enforcing the same terms (you can only opt in during one month, and are obligated for the entire year) solves the problem of someone deciding to buy only when they get ill, as you would have to wait for the enrollment window to open.  For acute conditions where adverse selection becomes most important this restriction resolves the problem.

All "insurance" companies must offer a true insurance policy covering only unlikely-but-catastrophic events on the same terms as their "full service" policies.  These were formerly called "major medical" or "hospitalization" policies, and have become very difficult to find.  They're relatively inexpensive as they do not cover routine doctor's visits or medications, but do cover catastrophes (e.g. a heart attack, cancer, stroke, etc.)  We must provide consumers with a reasonable-cost alternative to HMO/PPO coverage, and this is it.  If a company wants to sell "full-featured" policies that are unaffordable to a huge percentage of the population, we must mandate that they also offer affordable catastrophic coverage for those who prefer it (or can't afford anything else!)

All health providers must publish a price list and may not bill or accept payment at anything other than that price; doing so becomes a violation of Robinson-Patman and exposes the provider to civil suit for treble damages.  This instantly stops the practice of billing the uninsured or privately insured at a higher price than Medicare, for example - a practice that is rampant, particularly among hospitals.  Every hospital has a detailed price list for every function and thing in their health care panoply - this enforces even billing and even pricing for everyone, without discrimination.  The complaint that health providers cannot make a living at Medicare's reimbursement rates does not give that provider license to cost shift the expense of government-subsidized care to privately-insured or uninsured patients.  That sort of discrimination is outrageous and must be made unlawful.  Everyone would raise hell if your car was three times as expensive if you worked for Ford than if you worked for GM, yet it is accepted that if you're not insured by Kaiser (for example) your heart bypass surgery costs a different amount.  If Medicare's "price schedule" is inadequate the solution is for providers to refuse to provide the service at that price, not cost-shift the care of older Americans onto younger.  This is a more than $200 billion dollar a year rip-off of working-age Americans and it must end.

No event caused by the provision of your treatment may be billed to you.  Period.  Specifically, MRSA infections and similar contracted in a hospital cannot result in billing of that treatment to the consumer.  If you call someone to fix your roof and they break a picture window, they have to eat it - they can't bill you for the roof and the window which they broke!  The best incentive for better-quality care, particularly when it comes to controlling in-hospital cross-infection rates, is to make it ruinously expensive for hospitals to fail to prevent these adverse events.  Prohibiting by federal law the billing of any amount for a condition caused by the provider of health care (or a health facility) puts in place a very strong free-market disincentive for lax infection and process control. 

If you show up without insurance or ability to pay with a life-threatening condition, you will be treated, but the hospital cannot cost-shift the bill - it instead bills The Federal Government.  We have created an expectation that if you show up needing emergency treatment you will get it, irrespective of ability to pay.  This creates a monstrous problem for hospitals and results in the $30 aspirin, among other outrageous distortions.  The solution is to have The Federal Government receive all uninsured and unpaid bills, with the debt being immediately paid by the government.  Said debt then becomes a collection item against the citizen - a debt to the Treasury, administered by the Internal Revenue Service.  If you cannot pay cash, that's fine - the IRS will be happy to take payments (at interest.)  If you're an illegal alien the Federal Government will be mandated (by statute) to collect from the other nation, and if they refuse to pay, to deduct any such amount from foreign aid of any type and source on a dollar-for-dollar basis.

Five points and a fully free-market solution that brings affordable health care coverage to all who can buy it, yet protects those who cannot, while, to the greatest possible extent, forces everyone to bear the cost of their own decisions.

If you choose not to be insured and pay cash you are free to make that choice.  If you have a catastrophic illness or injury, insist on treatment but have no means to pay then you are subject to attachment of wages and assets by the IRS, a debt that is only discharged by your death.

Simple, fair, free-market and this path will dramatically control costs as free market competition will be forced to the forefront among health providers who will be compelled to make available their pricing schedules to everyone before they show up for treatment and are presented the bill.

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Senator Schumer apparently believes this is an unfair practice, and I agree.

July 24 (Bloomberg) -- Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban flash orders, saying the transactions give high-speed traders an unfair advantage over other investors.

Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their customers the opportunity to gauge demand before traders on other exchanges get the chance to bid, Schumer said in a letter to SEC Chairman Mary Schapiro. Brian Fallon, a spokesman at Schumers office, confirmed the authenticity of the letter.

Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public, Schumer wrote. That allows those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity, he added.

The senator said that if the SEC doesnt prohibit flash orders, he will introduce legislation that would.

This is my view:

  1. Getting a look at orders before someone else does is commonly called "cheating".  The National Market System (NMS) was supposed to prevent that; this was the so-called "innovation" of Nasdaq, remember?  No specialists, no balancing of orders to open a stock, all done by computer.  Equality of access.  Up until it became profitable to make some people more equal.  The intent of a public stock exchange is to insure equality of access to information so that the markets are orderly, not rigged.
  2. Using flash order information (or anything else) to front-run is illegal.  In all of its forms, this is an extremely serious matter and it must be stopped.
  3. To the extent that these HFT systems are in fact using flash (or other) traffic to get in front of orders and advantage themselves they are dramatically increasing the violence of market moves.  A stock trading at $20 that has a bid come in with a limit of $20.10 would normally fill (assuming sufficient depth) at $20; this does not materially move the market.  But if a HFT system "sees" that order, steps in front of it and buys up all the shares at $20 and then re-sells them to the customer at $20.04 (one penny better than the next best offer at $20.05) it has caused the current "last" price to move where it otherwise would not. Multiply this by millions of shares an hour and the impact on price moves could be tremendous.  While I understand that many people like the move of the last two weeks in the market, the fact remains that what goes up can also come down with equal violence.
  4. HFT systems that front-run are able to garner risk-free profits.  This is in fact the reason such a practice is banned - their "risk-free" profit is your guaranteed loss.  Remember, the markets are in fact a negative-sum game (due to trading costs) - if there is a "risk-free" opportunity out there it can only exist because someone else is guaranteed a screwing.

I call upon The SEC to conduct a full and public investigation of the HFT systems in use today, along with immediately banning the "flash" traffic in accordance with Senator Schumer's request.  I specifically want to know:

  1. Have any of these HFT systems been using flash traffic (or any other mechanism) to "step in front" of a flashed order?
  2. What part did these systems play in the October and March meltdowns, along with the ramp job of the last two weeks?  Specifically, were they stepping in front of orders in these cases, thereby dramatically amplifying market moves while skimming off their pennies?

Public and fair markets demand transparency.  All users must obtain access to order flow at the same time, without exception, and attempts to "step in front of the line" must be met with both civil and criminal sanction for market manipulation.

I can think of three relatively-minor changes that would leave those who are using HFT legitimately unharmed but would destroy most of the ability to cheat.  These are:

  1. Eliminate the 'flash order' entirely.  All market participants must get order and flow information at the same time - no exceptions.
  2. Force all orders (e.g. IOC, etc) to be valid for a reasonable minimum period that allows human response.  1 second would meet this criteria; it would destroy the ability of the "robots" to use abusive order patterns without preventing the legitimate use of "immediate or cancel" orders.  The time selected must be greater than the average human reaction time plus round-trip network transit time within the nation; visual recognition time for young adults averages a bit over 200 milliseconds (0.2 seconds) exclusive of the response (e.g. a mouse click) and round-trip transit time on high-speed circuits cross-country (corner-to-corner) is approximately 100ms.  Thus the minimum acceptable time is in the neighborhood of 500ms assuming no intervening computer computational delays (e.g. brokerage servers, etc); doubling this to provide for a margin (not all people are 20 years old, there are typically multiple computers between the exchange and end user, charting or display software requires time to post the event on the screen, etc) seems reasonable.
  3. Define as "front running" by law any scheme or practice that exposes or discovers orders to any select group of players before the market as a whole, irrespective of how.  The unfortunate reality is that there is no mechanism available to prevent computers from exploiting asymmetric information; ergo, you must define the provision or discovery and use of any such asymmetric information in the public markets as a criminal offense.  Penalties should include treble forfeiture of all profits gained from such an abuse and a permanent ban on all access to the securities business as well as prison time.

"Arms races" are inherently negative-sum games; the only winning party is the guy who is selling the weapons.  In this case the losers are the public and institutions who are attempting to invest or trade in the equities markets.

It is time to put a stop to this part of The Bezzle.

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Health care "reform" is the current hot-button, with the Obama administration now talking about a "public" health-insurance system to "keep the system honest."

Uh huh.

Look folks, you want to know why we have the health cost problems we have?  I'll lay it out for you - in a way you can't refute or argue with:

  1. There are no published prices.  In no other line of work is it legal to do this.  Nowhere.  You can't sell someone a hot dog and tell them after they eat it what it just cost them.  You can't hire a lawyer and have him tell you "I'll tell you what this will cost when we're done."  You can't hire an electrician and have him tell you "I'll make up a bill when I'm done."  In every line of work except health care, this is illegal.  There are even laws for "major" consumer work (e.g. contracting, auto repair, etc) where they must give you a binding written estimate before beginning work
  2. Robinson-Patman makes it illegal to discriminate against like kind purchasers of goods in pricing decisions when the effect of doing so is to lessen competition.  While it does not apply to services, it darn well should.  Whether you are paying privately, you have private insurance or you're a Medicare patient if you need to have a breast reconstructed due to cancer the complexity of the procedure does not change.  Yet it is a fact that the privately-billed amounts for uninsured ("rack rate") patients are often ten times or more that billed to insurers or Medicare.  Try charging a cash purchaser 10x more for a TV than someone who finances that TV on your in-house credit facility and you would be shut down and thrown in jail.

#1 and #2 exist because of explicit efforts by the "health care" industry to exempt themselves from the laws that every other merchant of every other good and service in the United States must adhere to.

To put this bluntly the medical industry has intentionally put forward a system by which it can screw you with impunity, obtaining exemptions from the laws that cover every other area of commerce, thereby effectively forcing you to buy overpriced services you do not want to purchase lest an unexpected life event literally wipe you out.

This is an extortion racket and absolutely none of the proposals being put forward have done a thing to address any of it.

If we want to fix the health care pricing problem we can do so.  It isn't very difficult.  Here's the prescription:

  1. All health care providers must publish a price list for the procedures and services they offer and the patient must be presented, when possible, with that information before services are performed or goods (e.g. medication) supplied, consenting to the charge in each case.  All normal anti-trust provisions with regards to collusion between providers apply.  If a physician doesn't like "flat-rate" billing they're free to publish a per-hour fee much like an attorney.
  2. No physician or group may discriminate based on the form of any external payment.  If they want to internally finance procedure(s), that's fine - they can charge interest or discount for that, or whatever.  But for anyone who pays via any other means (including the government) money is money - the price may not change based on the source of payment.
  3. No event caused by your presence in a medical facility or the actions of an employee there can come with cost to you.  It is absolutely common for people to be billed for treatment of MRSA infections acquired in the hospital!  That is equivalent to a mechanic that through incompetence or even malice cuts a wiring harness in your car while it is on the rack having the oil changed and then tries to charge you to fix what he broke!

Now clearly #1 doesn't work so well when you're unconscious due to a heart attack or just wrecking your car.  But setting your broken leg or performing a cardiac procedure is something that's done for people who aren't incapacitated too, so guess what - the price is already published and thus the charge known.

This prevents the common practice of hospitals gouging private payers, it exposes prices and brings competition to pricing, and allows the free market to work.  It ends the preference for "insurance" on routine procedures.

Next up, if you want to sell "insurance" in a market you must sell it to all persons in that market, defined as an area of at least one US State.  You may discriminate in your pricing only based on age and gender - nothing else.  If you sell that "insurance" product to any person you must sell to all persons within that state at the same price, and you must publish all your plans and offering prices.

"Insurance" products that are not true insurance products may not discriminate on reimbursement dependent on where the service is performed.  The practice of requiring "in network" doctors or even hospitals lest you get "rejected" must end.  In addition pre-qualification for any bona-fide non-elective procedure must be absolutely barred as a matter of law.

Finally, all providers of "insurance" must sell a true insurance product.  Common HMO/PPO plans are not insurance - they are pre-paid medical care.  Insurance is the purchase of a contract to cover damage caused by an unexpected event.  Everyone needs health care of some form.  Those who want to sell "pre-paid health plans" may do so, but they must also offer true insurance (e.g. covering ONLY hospitalization and related events, etc.)

These changes instantly destroy the connection between health "insurance" and employment.  If you leave your job you have the absolute right to keep your health plan by continuing to pay for it.  If you don't like your health plan or move out of the state you can buy any plan offered to anyone in your state, at your choice, for the same price they pay.

All mandates to provide specific services and products under "insurance" are federally preempted.  Women should be able to choose a health plan that does not include abortion (and/or pre-natal!) services, for example, if they would never use either.  Some women (e.g. those who have chosen to have a tubal ligation!) can't use these services, yet they often wind up paying for them in their premiums.  Men should be able to choose a plan that does not cover things like Viagra - or, if they choose, perhaps they do want "ED" coverage.

If the health lobby won't cut out the nonsense and work for this sort of change to the system then I am forced to advocate for full nationalization of the entire health system, effectively placing everyone under Medicare.  This will lead to forced rationing due to cost but that's happening already, and such a forced system will put a stop to the discriminatory practices of insurers, physicians, hospitals and others in the medical field who commonly bill private parties ten times what health "insurance" plans or Medicare pay for the very same procedure, while playing "let's deny coverage any time we think we can get away with it."

It is my opinion that we should be treating those in the health-insurance lobby, including hospitals, physicians and health-insurance providers, as co-conspirators in a racketeering scheme that effectively trades on the fear of disease and imminent bankruptcy to bamboozle and screw the population, while waving around their "hippocratic oath" - something better described as the "hypocritic oath."

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So long as we have an inauguration drawing this sort of crowd and not a protest about our government blowing $700 billion of our dollars so that The Pigmen of Wall Street can continue to rob our nation blind, then saddle us with the bill when their bets go bad, we will see no solution.

I cannot take credit for the idea floated on the forum, but I do like it.

It is time for We The People to send a strong message to Washington DC - no more. No more loading our children and grandchildren with debt. No more bailing out speculators and bankers who made bets they knew were unsafe at the time. No more bailing out people who came to Congress to demand the removal of leverage limits, got what they asked for, then blew themselves up with the very leverage they demanded to be able to use.

No more.

Therefore, on February 1st, which is more than enough time for Barack Obama to be seated in his chair in the West Wing, I am recommending an act of peaceful, lawful and yetunmistakableprotest.

That is, to mail President Obama one teabag. Nothing dangerous, nothing illegal - just one teabag.

Send one to your Congressman and one to each Senator.

Later, when the weather is a bit warmer and fountains are running water (rather than frozen!) this sort of protest can be repeated with LOOSE tea in select cities.

But for now, let's start with the symbolism, to be repeated each and every time our government votes or intends to do something similarly stupid - which I presume will include Obama's "stimulus" package.

If we all mail our teabags on February 1st, it will send a strong message to Washington. Include a copy of this Ticker, another Ticker related to the many bailouts (pick one!) or write your own letter condemning the fraud and abuse in our banking and financial system - with the teabag being your symbolic refusal to quietly pay for it.

Pass it around the blogs and email lists - its a bag of tea folks, and the obvious parallel to the Boston Tea Party of old should be instantly obvious to everyone who receives it.

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